PrefBlog

Standard & Poor’s has announced:

it has revised its outlooks on seven Canadian financial institution ratings to negative from stable. The financial institutions are:

• The Bank of Nova Scotia
• Central 1 Credit Union
• Home Capital Group Inc.
• Laurentian Bank of Canada
• National Bank of Canada
• Royal Bank of Canada
• Toronto-Dominion Bank

At the same time, Standard & Poor’s affirmed its ratings on all seven banks.
…
The outlook revisions are linked to our evolving views of economic risk and industry risk for banks operating in Canada. A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks. Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.
…
The negative outlook recognizes the potential for deterioration of Canadian banks’ financial performance and capitalization generally, associated with consumer debt burdens proving excessive in an unfavorable economic scenario, or due to competitive pressures amplified by the shift to a consumer deleveraging phase.

Over the past decade, Canadian consumer credit market debt (including residential mortgage loans and consumer credit) has risen to more than 150% from 110% of disposable income, and relative to GDP, consumer debt has increased to more than 90% from about 70%. Over the same period, Canadian house prices have approximately doubled, with compounded real growth in housing prices estimated to be about 5% per year.
…
Bank risk profiles have benefited from Canadian banks’ underwriting practices, stable performance metrics for banks’ credit portfolios, and the sharing of mortgage risk between the banks, the borrowers (extensively based on full recourse to the consumer), and the providers of mortgage insurance, notably the Canada Mortgage and Housing Corporation (AAA/Stable/A-1+). In our view, Canadian banks’ risk tolerances and risk management capabilities are generally strong and attuned to risks inherent in the Canadian consumer and housing sectors. Even so, we believe there is currently growing potential for deterioration of Canadian bank credit profiles associated with scenarios incorporating consumer sector stress.

Systemic factors are incorporated in Standard & Poor’s rating methodology primarily through its Banking Industry Country Risk Assessment, or BICRA. The BICRA framework takes into account economic and institutional risk factors present in the environment in which banks operate. Canada’s BICRA is currently set at ‘1’ (lowest risk) on a 1 to 10 scale. The BICRA component of the analysis is intended to highlight emergent systemic risks that may not be fully apparent when viewing the sector at the level of individual banks.

The following preferred shares of the affected banks are outstanding:

BNS.PR.J, BNS.PR.K, BNS.PR.L, BNS.PR.M, BNS.PR.N, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PT.T, BNS.PR.X, BNS.PR.Y, BNS.PR.Z.

LB.PR.D, LB.PR.E.

NA.PR.K, NA.PR.L, NA.PR.M, NA.PR.N, NA.PR.O, NA.PR.P.

RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.L, RY.PR.N, RY.PR.P, RY.PR.R, RY.PR.T, RY.PR.W, RY.PR.X, RY.PR.Y.

TD.PR.A, TD.PR.C, TD.PR.E, TD.PR.G, TD.PR.I, TD.PR.K, TD.PR.O, TD.PR.P, TD.PR.Q, TD.PR.R, TD.PR.S, TD.PR.Y.

This entry was posted on Friday, July 27th, 2012 at 7:13 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.